Czech Republic Monetary Policy September 2017

At its 27 September meeting, the Czech National Bank (CNB) voted by a slim majority to keep the two-week repo rate unchanged at 0.25% and the Lombard rate at 0.50%. The discount rate was also left steady at 0.05%. The decision came after the Bank hiked the two-week repo rate and the Lombard rate for the first time in nine years at its August meeting. This month, four members of the Bank Board voted to keep rates unchanged, while three members voted to raise the two-week repo rate to 0.50% and the Lombard rate to 1.00%.

The decision is consistent with both August’s weaker-than-expected inflation reading and the Bank’s unchanged inflation forecasts, which project inflation will remain in the upper half of the 2.0% plus or minus 1.0 percentage point tolerance band for the rest of the year before decreasing towards the midpoint in early 2018. Moreover, the vote was also influenced by slightly lower expectations on euro interest rates. The ECB’s monetary policy weighs considerably on the CNB’s moves, as a large interest rate differential could trigger important capital inflows and lead to an undesired appreciation of the Czech koruna.

On the other hand, growth accelerated notably in Q2, and the economy is now one of the fastest growing in the EU. Household spending remains one of the pillars of growth and is being supported by extremely tight labor market conditions, which are translating into rapidly growing wages. Moreover, labor shortages threaten to push up wages further and growth in agricultural producer prices remains elevated, which could cause inflation to rise faster than expected in the months ahead.

The statement made it clear that an additional increase in rates is to be expected within the next two years. Nevertheless, the timing remains uncertain, as it will depend on several macroeconomic variables, including the pace of growth of the economy, the ECB’s monetary policy, further wage pressures and the evolution of the exchange rate.

Against this backdrop, FocusEconomics Consensus Forecast panelists on average expect the two-week repo rate to rise slightly by the end of the year. The panel foresees the two-week repo rate at 0.28% at the end of 2017 and projects it will increase further to 0.85% at the end of 2018.

At its first meeting of the new year, held on 1 February, the Czech National Bank (CNB) unanimously decided to increase the two-week repo rate by 25 basis points to 0.75%, and the Lombard rate by 50 basis points to 1.50%; the discount rate was, however, left unchanged at 0.05%.